Commercial real estate loan is a type of financing that allows business owners to purchase property. It is typically a shorter term than traditional mortgage loans. It also has higher interest rates and fees.
A commercial loan can be sourced from various lenders, including banks and private investors. Banks tend to be more strict and require a strong credit history and a high debt service coverage ratio (DSCR). Hard money lenders prioritize property value over creditworthiness.
There are several types of commercial real estate loans, and each type comes with different requirements. Generally speaking, you’ll need to provide extensive documentation and have solid credit and a strong business history to qualify for one. Depending on the type of loan, it may take weeks or months to secure a commercial property loan.
Conventional bank loans are a popular option for commercial real estate financing. They’re typically offered by national banks and offer competitive interest rates. However, you’ll likely need to have a FICO SBSS score of 140 or higher to qualify. Conventional real estate loans are typically fixed for five years, and you’ll be required to make a 20 percent down payment. Some lenders also charge a prepayment penalty.
Commercial lending is not backed by the VA or FHA, and lenders must rely on the underlying property as collateral for commercial loans. The lender places a lien on the property and can seize it if you don’t meet your repayment terms. This type of financing is typically only available to developers, funds or corporations who own the underlying property. For small businesses, a commercial property loan is only appropriate if the company occupies at least 51% of the building. Otherwise, you should apply for an investment property loan instead. You can get a commercial real estate loan from banks, online lenders or hard money lenders.
Interest rates for commercial real estate loans vary depending on the type of loan and lender. A conventional bank loan typically has the lowest interest rate, but it requires a large down payment. Other types of commercial real estate loans include mezzanine financing, which can reduce the required down payment to as low as 25 percent.
Whether or not you qualify for a commercial real estate loan will depend on your business credit score, personal income, and the property’s value. The higher the quality of the asset, the more likely you are to get approved for a loan. The underwriting process is more stringent than for residential mortgages, so it’s best to consult a financial advisor to find out how much you can afford to borrow.
Another factor to consider when applying for a commercial real estate loan is the debt-service coverage ratio (DSCR). This ratio compares the property’s annual net operating income (NOI) to its annual mortgage debt service, including principal and interest. It helps lenders determine the maximum loan size based on the property’s cash flow. A DSCR of less than 1 indicates negative cash flow and is generally unacceptable to lenders.
Some commercial real estate lenders structure their loans with a balloon payment, which means you will make lower monthly payments for 10 years and then owe the remaining balance in one lump sum at the end of the term. This type of loan has a higher interest rate than a fully amortizing commercial loan, but it’s an excellent option for investors who want to make quick purchases.
Commercial real estate loans are often accompanied by fees that can add up, such as legal and appraisal costs. These costs are a necessary part of the lending process, so it’s important to understand them before you start shopping around for commercial financing.
It’s also essential to shop around for the best rates and qualifications. Commercial mortgages have different terms, and lenders will require extensive documentation of your business to determine if you’re a good risk. These lenders may include banks, credit unions, independent lenders, pension funds, insurance companies, and the Small Business Administration’s 504 loan program.
Lenders will also consider your business’s financial stability and cash flow to determine if it can cover loan payments. They will typically require three years of personal tax returns and a financial statement, as well as detailed information about the property you’re buying.
Many business owners turn to commercial lines of credit as a way to finance real estate investments. These revolving credit lines are similar to business credit cards, with a set credit limit that you can borrow from as needed. You’ll pay interest on the amount you borrow, and your available credit will reset as you repay it. You can use a mortgage calculator to estimate your monthly payments. However, remember that this will not take into account other fees associated with commercial real estate loans.
Whether you’re a commercial real estate developer planning a new development or a business owner seeking to refinance an existing property, it’s important to know your options. There are many lenders that offer commercial mortgages, and each has its own requirements and rates. You can find a lender that matches your needs by comparing online applications, speaking with representatives and looking at the fine print.
Unlike residential mortgages, which are typically secured by individual borrowers’ personal credit scores, commercial loans are secured by the property itself. As a result, the underwriting process is more complex, and lenders must carefully evaluate the property’s value. This can take months to complete, but it’s worth the effort.
The types of lenders that provide commercial real estate loans are varied, including national banks and regional institutions. Some of them also offer bridge loans, which are short-term financing for a new project or an expansion. These loans can be used to purchase a commercial property before applying for a traditional mortgage, or they can be used as a down payment on a new construction.
Another common type of commercial real estate loan is a business line of credit, which provides a revolving source of funds. This can be a good option for businesses that need flexible funding, but can’t meet the strict requirements of conventional lending. These lines of credit are available from both national and regional banks, and can range in size from $1 million to $20 million.